LIC pays Rs 2,000 cr as taxes

The claim is on account of the amount set aside for meeting its solvency margin.

The Life Insurance Corporation (LIC) has paid around Rs 2,000 crore under protest after the income-tax department raised a claim for the sum, spread over two to three assessment years, according to company executives.

The huge tax claim is largely on account of the amount set aside by LIC for meeting its solvency margin.

As per the norms laid down by the Insurance Regulatory and Development Authority (IRDA), every insurance company has to set aside funds to meet the required solvency margin, calculated at 150 per cent.

Officials said the income-tax department was of the view that providing for the solvency margin could not be treated as an expense as LIC was believed to have done.

Hence, the income cannot be set off as an expense towards providing for the solvency margin in order to claim tax deductions.

The state life insurer, on the other hand, is of the view that provisioning for the solvency margin is a mandatory requirement.

The matter is currently pending appeal. LIC has a capital of Rs 5 crore and it needs provisioning in excess of Rs 14,000 crore towards the required solvency margin. It has been managing to meet this partly through investment income and policyholders' funds.

Private life insurance players, on the other hand, provide for this through shareholder capital. Provisioning towards the solvency margin ensures the solvency of a company and its ability to meet all future liabilities.

In 2004-05, LIC will be required to meet 150 per cent of the solvency margin, against the Rs 11,000 crore provisioning it made last year for 100 per cent of the statutory requirement.

In the current financial year, over Rs 16,000 crore is expected to be set aside. Although all private players have maintained 150 per cent of the required solvency margin, LIC "" by virtue of the LIC Act "" had not earlier provided for this.